Western Union: Bargain Value Stock Yielding 3.9%, or Tomorrow’s Kodak?

We’re living in a world where we can flash our smartphone screens against a reader in our local Starbucks (SBUX) outlet to pay for our deluxe coffee drinks, use PayPal, eBay’s (EBAY) service, to reimburse our friends for picking up theater tickets and generally, never touch a filthy dollar bill ever again. Just ask David Wolman, author of “The End of Money”, who is predicting just what the title of his book implies. “Cash is being pushed further and further to the margins of our society because it’s simply not efficient,” Wolman argues.

So, one wonders, why not invest in Western Union (WU), the granddaddy of the electronic payments systems companies, founded all the way back in 1855? The company looks like a great value stock, having plunged to hit a three-week low and sending its PE ratio plunging and its dividend yield soaring.

WU Chart

WU data by YCharts

That big movement came hard on the heels of a disappointing earnings release last month, when Western Union announced lower-than-expected sales levels and said its earnings for the year will be below levels it had forecast in July. Margins also appear to be contracting, while free cash flow is below the levels where it started the year.

WU Gross Profit Margin Quarterly Chart

WU Gross Profit Margin Quarterly data by YCharts

In the wake of that earnings release, Standard & Poor’s cut its rating on the company’s debt by one notch to three levels about junk, in part because of the company’s focus on maintaining a high and increasing dividend and authorizing a new stock repurchase program in the midst of a competitive and uncertain market. A setback to the economy will put a dent in Western Union’s ability to generate profits, as it relies heavily on immigrants who remit portions of their earnings to families abroad. Meanwhile, new competitors and new regulations (especially in the case of transfers from the United States to Latin America) also are likely to eat into profits, analysts at S&P, Moody’s and other rating agencies have concluded. Indeed, the rate of revenue growth already is declining.

All speed bumps, some have suggested, even YCharts contributor Stephane Fitch, for an otherwise sound business.

WU Revenue Quarterly YoY Growth Chart

WU Revenue Quarterly YoY Growth data by YCharts

If it seems hard to imagine the electronic payments business today without Western Union, just remember the fate of Eastman Kodak, which made those easy-to-use, point and shoot cameras that many of us used for our first forays into photography, or Blockbuster, which briefly reigned over home entertainment as the place to pick up a video or DVD for the weekend. Western Union is far from being the only player on the block in an increasingly crowded and commoditized business.

Is Western Union’s business model broken? It seems premature to reach that conclusion – this isn’t like J.C. Penney (JCP), another venerable brand that clearly seems to be circling the drain already. But its business is under siege and there are enough uncertainties to approach only with caution.

Suzanne McGee is a contributing editor at YCharts, which includes the just-released YCharts Pro Platinum for professional investors.

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